Due to the rally in equities over recent years, the implantation of the retail distribution review [RDR] and a much wider use of discount control mechanisms by boards of directors, it had become increasingly difficult for investors to find wide discounts across the investment trust sectors.
However, along with the FTSE All Share’s 5 per cent fall over recent months, certain trusts discounts have fallen out of bed and in this article we ask investment trust experts which vehicles bargain-hunting investors should target.
Dunedin Smaller Companies
Winterflood’s Simon Elliott says Ed Beal’s Dunedin Smaller Companies trust is a good example.
It is currently trading on a 16 per cent discount as a result of lacklustre NAV returns, falling investor appetite for small-caps and its small size. However, Elliott says given that its one-year average discount is 8 per cent and as it has traded on a 2 per cent premium at points over the past 12 months, now is an attractive entry point.
“Yes, it is one of the smaller trusts in the UK Smaller Companies sector, but it has performed well and it is run by Ed Beal, who is an experienced manager,” Elliott (pictured) said. “He uses the Aberdeen quality/value approach, which means it can lag in a strongly rising market but can outperform over a full market cycle. It also offers a relatively attractive yield of 2.9 per cent at the moment. Its current 16 per cent discount is attractive to both its own history and its peer group composite, which is on a 9 per cent discount.”
He added: “It does offer you less liquidity as it has a market cap of less than £90m, but I think it does offer good discount value at the moment.”
Beal has managed Dunedin Smaller Companies since December 2005.
According to FE Analytics, it has returned 126.68 per cent over that time and has beaten its benchmark – the FTSE Small Cap ex IT index – by 68.13 percentage points in the process. While it was outperforming the IT UK Smaller Companies sector up until recently, its losses of more than 16 per cent in 2014 has affected its longer-term numbers.
Performance of trust versus sector and index since Dec 2005
Source: FE Analytics
Beal’s largest sector overweight is industrials, which account for 40 per cent of his trust’s NAV. Dunedin Smaller Companies has gearing of 4 per cent and ongoing charges of 0.82 per cent.
SVG Capital
Private equity trusts, which invest in unquoted areas of the market, had been en vogue during the rising markets of 2012 and 2013 as the majority of investors felt more comfortable taking risk.
However, the sector has been hit hard over recent months as the market has fallen and Ewan Lovett-Turner, associate director of investment companies research at Numis, says the SVG Capital – the £1.2bn FTSE 250-listed vehicle – now looks particularly attractive.
“One area which looks more attractive is private equity, as discounts have widened by a reasonable amount,” Lovett-Turner said.
“An example is SVG Capital, which is now on a 20-odd per cent discount. When you’ve got a well-managed trust, like SVG, a wide discount certainly offers you an opportunity. The NAV may lag in a falling market, but if you are looking for value we think it is one of the areas that you can find it.”
Lovett-Turner also says the future of the trust is bright as its management is attempting to make the portfolio more diversified and because the board has scheduled a tender offer for December, which should both attract attention.
Though SVG Capital has lost money over 10 years due to its significant falls during the financial crisis, investor who bought shares five years ago would now be sitting on a return of 254.06 per cent – making it the second best performing portfolio in the IT Private Equity second over that time.
Its benchmark, the FTSE 250 index, has returned 99.27 per cent over five years.
Performance of trust versus sector and index over 5yrs
Source: FE Analytics
It is a global portfolio and it doesn’t use gearing.
Acorn Income
Lovett-Turner also thinks the Acorn Income trust looks attractive on its current 10 per cent discount.
The portfolio had been managed by FE Alpha Manager John McClure since its launch in 1999 until his death earlier this summer. This news, combined with the poor performance of smaller companies relative to FTSE 100 stocks so far this year, meant shareholders of the trust have lost a chunky 15 per cent year-to-date.
Given that the trust has a yield of above 4 per cent, has traded on a 4 per cent premium at points over the last 12 months and as the new managers – Simon Moon and Fraser Mackersie – are fully “indoctrinated” into McClure’s approach, Lovett-Turner says now is a decent buying opportunity.
“Clearly, it offers investors attractive yield and though a new management team has taken over, the approach Mackersie and Moon are using is exactly the same as McClure’s,” Lovett-Turner said.
“I think it is on a decent discount and though it does have high gearing – via its zero dividend preference shares – the manager’s focus on companies with strong cashflows and low leverage means that volatility has been relatively low.”
The trust sits in the IT UK Equity & Bond Income sector and though it is predominantly a smaller companies equity portfolio, around 20 per cent is invested in bonds.
According to FE Analytics, Acorn Income has returned 324.52 per cent since over 10 years, beating the Numis Smaller Companies ex IT index which has returned 185.81 per cent. It has also beaten its benchmark over three, five and seven years.
Performance of trust versus sector and index over 10yrs
Source: FE Analytics
Due to its zero dividend share class, the trust has unusual gearing of 44 per cent. It has ongoing charges of 0.7 per cent, but has a performance fee of 15 per cent.
